Question

Topic: Tobacco products

The government's tax/subsidy policy in these areas and any objectives of the tax policy. In the United States, federal, state, and local governments tax tobacco. Tobacco products are taxed in two ways: the unit tax, which is based on a constant nominal rate per unit (that is, per pack of cigarettes), and the ad valorem tax, which is based on a constant fraction of either wholesale or retail price. Currently, federal taxes on cigarettes, small cigars, and smokeless tobacco products are unit taxes; federal taxes on large cigars are ad valorem taxes. Cigarette tax rates across the country, which vary widely from state to state and are levied on top of a federal rate of $1.0066 per 20-pack of cigarettes. States didn’t start taxing tobacco until the 1920’s, but by 1969, each state and the District of Columbia had followed suit. And although cigarettes are already one of the most heavily taxed consumer goods in the U.S., many states continue to target smokers with increased rates. In fact, effective this month, Vermont’s cigarette tax jumps up 13 cents to $2.75 a pack, sliding the Green Mountain State ahead of New Jersey into 8th in the ranking (Emanuel and Borean, 2014).

Goal

My goal would be to lower the percentage of people who use tobacco products

Prescribed action

Increase the price of selling and purchasing tobacco through taxation Why I believe it will work During my research, I found that the demand for tobacco products is not as elastic as demand for many other consumer products. I also founded that research has consistently demonstrated that increases in the price of tobacco products are followed by moderate falls in both the percentage of people smoking and the amount or number of tobacco products that remaining smokers consume.

The percentage of people smoking declines because tax increases discourage non-users from starting, encourage current users to quit and, also very important, discourage former smokers from starting again. Because increases in tobacco taxes result in higher tobacco prices for everyone, the effect of even small resulting reductions in tobacco use can be very large across the whole population. Depending on the amount of the price increase, a reduction in the consumption of tobacco products following increases in tobacco taxes can be huge. Furthermore, a World Bank review conducted in 1999 concluded that, price raises of about 10% would on average reduce tobacco consumption by about 4% (World Bank). This may not seem like much to some but it’s a start.

Questions: You want to reduce tobacco usage ( but what percentage?), and it is through tax increment, right? In what percentage you want to increase? and how it would affect to all people. Not sure what this is asking. If you could please provide a 250 word explanation I would appreciate it. Thank you.

Answer 1

Tobacco is a demerit good, a good which can have a negative impact on the consume which are generally ignored by the consumer. Consumers may underestimate the cost related to their own health. So, there is a reason to try and stop people smoking. Tobacco has many negative externalities, i.e. the consumption of tobacco has negative impact on the third party.So, social cost is higher than the private cost. Consumers of tobacco must pay the true social cost so that the social efficiency can be increased. a tax causes the supply curve to shift to left which will result in fall in demand. So, they are talking about tobacco usage reduction through tax increment.They are saying price increase of about 10% would reduce tobacco consumption on an average by 4%, because the demand is very inelastic (high increase in price will change quantity demanded by low amount). If we want to reduce usage by high amount, prices should be changed by very high percentage. But it can have an affect to all people. Increasing tax on tobacco will lead to increased tax revenue. This can help the government to spend money on health care as swell as on campaigns to motivate people to stop taking tobacco. So, spreading the awareness about the negative effects of tobacco is a real impact and help in shifting the demand curve to the left i.e. the reduction in tobacco usage, rather than shifting the supply curve(by imposing tax) and in turn reducing the illegal market. Higher prices through higher taxes will encourage people to smuggle(black market) illegal tobacco and avoid paying the tax.